Pillar #7 of Market Surveillance 2.0: Dynamically evolve rules

Terry Flanagan

Pillar #7 of Market Surveillance 2.0: Dynamically evolve rules

By Theo Hildyard , Software AG

In the seventh and final blog in our series outlining the Seven Pillars of Market Surveillance 2.0, we discuss the need to evolve rules dynamically in order to incorporate new anomalous behaviors as they come along.

Flash crashes, hash crashes, rogue traders, market manipulators, insider traders, fat fingers, wild algorithms, Libor fixing and FX benchmark manipulation scandals all show us that new issues are always around the corner. There is no doubt that new variants of these unwanted behaviors, as well as completely new ones, will emerge this year, next year and beyond.

Once you have implemented the first 6 Pillars of Market Surveillance these unwanted behaviors will be unearthed and spotted before they can do any damage in the market. Then, these previously unknown behaviors will become known behaviors.

Theo Hildyard, Software AG

Theo Hildyard, Software AG

It is at this stage that Pillar #7 — the ability to evolve new rules at any time –will become critical. Once you spot a new unknown behavior, you need to make it a known behavior and add a new rule to the system. And it is critical to be able to add new rules dynamically through self-service, rather than relying on a “shrink-wrapped application” and being beholden to a software provider.

Because the next episode of a known behavior could occur at any time; it would be complacent to think that because one has been discovered that it won’t happen again. Think about insider trading; although it is illegal and many culprits have been caught and prosecuted, it still occurs. Being able to get your rules changed dynamically and quickly means that you can immediately spot new known behaviors before they happen again.

Pillar #7 wraps up our series of blogs. We believe that by employing all Seven Pillars of Market Surveillance 2.0, this next generation of surveillance will help us to see the early warning signs of unwanted human or technological behaviors that signal error or fraud. The crystal ball is complete.

To recap, here is a summary of the Seven Pillars of Market Surveillance again:

Here are the Seven Pillars of Surveillance 2.0: 

  1. Converge siloed systems such as anti-money laundering, operational risk and trader profiling into a single monitoring system for a correlated view of potential threats.
  2. Perform “continuous analytics” using real-time information and historical data to help predict that something might be about to happen – and prevent it.
  3. Include data from social media, email and chat rooms to alert management to anomalous human behaviour.
  4. Monitor across asset classes to prevent rogue algorithms from running amok in more than one market.
  5. Monitor cross-region to assure adherence to different regulatory environments.
  6. Monitor for “unknown unknowns,” by benchmarking behaviour that is “normal” over time and spotting behaviour that deviates from the norm.
  7. Turn a new unknown behaviour into a known behaviour by dynamically adding new rules to the system.

The Seven Pillars of Surveillance 2.0 will lead you to the next generation of bigger and better market surveillance.  Good luck!

To find out more, download the full whitepaper here:

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